When you take a loan against a Fixed Deposit (FD), the bank uses your deposit as collateral and offers funds at a relatively lower interest rate than most unsecured loans. The way interest is calculated depends on whether the facility is structured as a term loan or an overdraft against the FD. Understanding these two options can help you choose the most suitable borrowing method based on your financial needs and repayment capacity.
In a loan against FD structured as a term loan, the bank disburses a lump sum amount directly into your account. Interest is charged on the entire loan amount from the date of disbursement, regardless of how much of the money you actually use. The interest rate generally remains fixed throughout the tenure and is usually a few percentage points higher than the FD interest rate. Repayment is made through Equated Monthly Instalments (EMIs) or according to the agreed repayment schedule.
Alternatively, banks may offer an overdraft (OD) facility against your FD. Under this arrangement, the bank sanctions a credit limit, typically ranging from 80% to 90% of the FD value. You can withdraw funds whenever required, up to the approved limit. The key advantage of this facility is that interest is charged only on the amount utilised and only for the number of days it remains outstanding. For example, if you withdraw a portion of the available limit and repay it quickly, you pay interest only for that period and amount. The interest rate is generally linked to the FD rate, with a small premium of around 1% to 2%.
An overdraft against FD also offers greater repayment flexibility. There are usually no fixed EMIs, and you can deposit or withdraw funds multiple times within the sanctioned limit. However, the outstanding amount must be cleared before the FD matures. This flexibility makes the OD facility a preferred option for managing short-term or fluctuating cash flow requirements.
Term loan vs overdraft against FD: How interest works
The loan against FD interest rate differs by facility: term loans charge the full disbursed amount, while overdrafts charge only the utilised amount.
| FD loan interest calculation | Term Loan | Overdraft |
|---|
| Disbursement | Lump sum | Limit up to 80%–90% of FD |
| Interest charged | Entire amount | Utilised amount for outstanding days |
| Repayment | Fixed EMI schedule | Flexible deposits and withdrawals |
| Rate premium | About 2% above FD rate | About 1%–2% above FD rate |
| Best suited for | One-time expense | Short-term or changing cash needs |
Term loan against FD
A term loan against an FD pays the approved loan as a lump sum. Interest begins on the entire amount from the disbursement date, even when some funds remain unused. Repayment generally follows a fixed EMI schedule, while the pledged FD continues earning interest at its contracted rate. This structure suits a large, one-time expense requiring the whole amount upfront immediately.
Overdraft (OD) facility against FD
Loan against FD overdraft interest applies only to the amount withdrawn and the days it remains outstanding. The lender provides a credit limit, commonly up to 80%–90% of the FD value, subject to policy. The rate is 1%–2% above the deposit rate. This structure suits short-term or fluctuating needs because borrowers can withdraw, repay, and reuse funds within the limit.
